The stock market is arguably overpriced right now, but investors can still find top Canadian stocks that trade at reasonable prices and offer good opportunities for gains in the coming months.
Gold stocks are among the rare laggards in the 2021 market rally, but the story could change through the end of the year and in 2022.
The price of gold topped out near US$2,080 per ounce last summer. It currently trades near US$1,800. That’s about a 13.5% drop, which isn’t much considering the rapid acceleration of the price of gold in 2020. The gold miners, including Barrick Gold (TSX:ABX)(NYSE:GOLD), are generating significant profits and free cash flow at US$1,800 per ounce, yet their stocks have plunged compared to the pullback in the gold price. Barrick Gold, for example, trades near $27 per share at the time of writing compared to the 2020 high around $40. The share prices of the gold miners are normally more volatile than the price of the metal itself, but the more than 30% drop in Barrick Gold’s stock price appears overdone.
The company has zero net debt and is generating so much free cash flow that the board decided to give investors a special US$750 million return of capital in 2021. That works out to US$0.42 per share, on top of the US$0.36 per share in annual dividend payments.
Gold could be headed for an ideal situation where central banks keep interest rates very low, even in the face of accelerating inflation. Gold is widely viewed as an inflation hedge, and the precious metal is more attractive in a low-rate environment. Another meltdown in the cryptocurrency market wouldn’t be a surprise in the next 12 months. That could provide gold with an additional tailwind.
Ongoing volatility should be expected, but Barrick Gold’s stock appears undervalued today.
Canadian National Railway
CN (TSX:CNR)(NYSE:CNI) traded for $148 per share earlier this year, supported by the ramp up of the post-pandemic economic recovery. The stock then plunged to below $130 on news that CN had outbid its Canadian rival, CP Rail, to win a battle for the anticipated takeover of Kansas City Southern, an American railway with access to Mexico.
CN had to offer a 20% premium over CP’s already generous offer to win Kansas City Southern’s favour. It also had to fork over hundreds of millions of dollars to cover the break fee owed to CP Rail. All of this could be wasted money if regulators decide to block the deal.
One way or the other, CN’s share price looks cheap today at the current price near $135. If the company manages to close the Kansas City Southern purchase, it will have a unique rail network that connects the Pacific and Atlantic coasts in Canada, the Gulf Coast in the U.S., and key routes to Mexico.
However, a refusal from regulators would simply mean CN continues to operate as a very profitable and efficient player in the North American rail industry. As economic activity ramps up, CN should see revenues grow in step with increased demand for its services.
The bottom line on top Canadian stocks
Barrick Gold and CN are industry leaders that should be solid picks for a buy-and-hold portfolio. The stocks appear undervalued right now in an expensive market and should outperform in the next 12-18 months.